The Importance of Cash Flow Management

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The Importance of Cash Flow Management
By Miranda on August 27th, 2009


One of the things that can make you or break you financially is your skill at cash flow management. For the purposes of personal finances and individual wealth management, your cash flow is the way money moves through your own small financial system. It’s the way your income flows into your bank accounts and then flows out to expenses and investments. And what is left over. Figuring out how your cash moves through your personal financial system is vital if you want to turn your money to better use, and if you want to be financially successful.

Figuring your cash flow

You will want to know whether your cash flow is positive, negative or zero. With a positive cash flow, you will have a surplus at the end of the month. With a negative cash flow, it will appear that you are overrunning your income — leading to excess debt and additional costs due to interest. And, finally, zero cash flow means that your inflows and outflows are balanced. (If you are into the zero-based budget, your goal is to reach zero cash flows.) One of the easiest ways to figure your cash flow is to use a calculator.

However, you can also do it on your own. First, add up your monthly income from all sources, including what you get from dividends or other income investing. Pay attention to where you are getting your money from. Next, add up all of your expenses. This includes money that you put into savings, retirements accounts and other investments, and money that you give to charity or your church. Catalog where your money is going. There are many tools available in the market, some even online, that can help you understand and plan your income, expenses, debt and savings.

I like to take it a step further, and look at when I receive income and when expenses are due. In cash flow management, when matters. I found this out the hard way a couple of years ago. Excited about a new client, I wrote a bunch of checks for bills, even though some of them weren’t due until the end of the month. What I forgot to figure was that my mortgage payment came out automatically on the 15th. And my mid-month income didn’t come until that day — and it takes three to four business days to get it from PayPal into my bank account. As you might imagine, overdraft charges ensued (no bounced checks, though). $300 in bank charges taught me to schedule bill payments in a manner that matches up with when I am paid.

Tweaking your cash flow

After you have an idea of where you are at (a calculator or personal finance software can provide it for you in all it’s color-coded glory), it’s time to tweak the way money moves through your personal financial system. Look at your expenses. As much as possible, they should be focused on things that will pay you back some how. Examine your priorities to see what provides you a benefit. If you enjoy eating out, but you aren’t that into watching TV, perhaps you should shift some of your resources toward eating out, and cut your cable package.
You should also examine where you can put more money into items that will pay you back down the road. Being able to increase money outflows into investments are likely to repay you, justifying the expense. Charitable giving provides intangible benefits such as a feeling of satisfaction from helping others or spiritual benefits (for believers). And besides, there’s a tax benefit.

Thoughtfully arranging your spending so that you make the most of the money you have coming in can help you in the future. Understanding how money moves through your personal financial system right now can help you cut back on waste, and help you create a realistic financial plan that can help you walk the path to financial freedom.


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